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October 23, 2012

Downgrades Drive Spanish Bond Yields Higher

Moody’s cuts five regions’ ratings as economy shrinks

Five regions in Spain were hit by ratings downgrades by Moody’s, sending yields higher and prices lower on Spanish bonds at a Tuesday sale. The Spanish economy also showed further contraction.

Moody’s announced late Monday that it had decided to cut the ratings of the five regions by one or two notches, citing limited cash reserves and bond repayments that are coming due—as well as, for four of the five, “significant reliance on short-term credit lines to fund operating needs.” Andalucia, Extremadura, Castilla-La Mancha, Catalunya and Murcia all saw ratings drops, while other regions were confirmed at their existing levels.

The news sent bond yields higher and prices lower at a Tuesday sale, although demand was in line with its maximum target, and Bloomberg reported that other economic news was bad as well: for the fifth straight quarter, the Spanish economy contracted, with GDP falling 0.4% in the three months through September from the previous quarter. According to the Bank of Spain, that matches Q2’s rate of contraction.

The Bank of Spain also said that the country’s economy likely shrank 1.7% in Q3 from a year ago, with rising unemployment, savings depletion and a lack of disposable income to pay down debt all took their toll on the Spanish people. Some economists believe that the flow of bad news won’t stop for a while.

Ricardo Santos, an economist at BNP Paribas in London, was quoted saying, "The fact that consumption fell less than in the second quarter ahead of the September tax increases suggests that the worst of the contraction is yet to come. The full impact of the austerity measures should be felt later this year and into 2013.”

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